Session 22: Valuing Private Businesses

In this session, we talked about the challenges of valuing private company, especially when the buyer is undiversified and cares about liquidity. We argued that you need to adjust for the lack of diversification in your discount rate (using a total beta). If you are interested, I do have total betas, by sector, on my website and you can find the data here:
We also talked about dealing with the lack of liquidity with an illiquidity discount, which should vary across companies, buyers and time. We also showed why the value to a private buyer will be lower than to a public buyer, and that this can lead to shifts in ownership of assets over time. I am also attaching the weekly challenges (two, but very simple) for the week.

[r.a.p.h]

*Timestamps*
6:00 Start of the class test
14:30 PRIVATE COMPANY VALUATION
14:30 Process of valuing private companies
16:10 1. No market value?
17:30 2. Cash flow estimation issues
21:17 Private company valuation: Motive matters
23:12 Private company valuations: 4 broad scenarios
23:50 I.Private to private transaction
25:46 An example: Valuing a restaurant
28:36 Step 1: Estimating discount rates
42:34 Step 2: Clean up the financial statements
44:39 Step 3: Assess the impact of the "key" person
52:31 Step 4: Don´t forget valuation fundamentals
53:30 Step 5: Complete the valuation
56:55 Step 6: Consider the effect of illiquidity
1:13:39 II.Private company sold to publicly traded company

[jagatdave]

Valuation points..1.key person discount 2.illiquidity discount...3..accounting problems...basically less faith in numbers provided by private company owners

[marcostriolo]

Hi Professor, are you going to take sessions about how to use monte carlo simulations to obtain a distribution for the stock value, instead of a point estimate for the stock value? Thank you for your lectures. Marco

[ivonajavorovic]

what is r(squared) for VC in this example? How can I calculate it?

[Saywhatohno]

Which course/degree is this for? And does anyone have all the lectures for aswanth?

[jagatdave]

Few advantages...where..private companies are in better common people do not like but are essentials .1.dairy business in India...2.defence industry..3..marijuana company in usa...4.tobacco company.like ITC in india.

[randomdude]

Sir, you've referred to Econ 101 quite a few times during these lectures. Would it be possible for you to make a few videos on Econ 101? I've grown to understand finance a little bit courtesy of your videos, would be really great if you could post a few videos on Econ 101. Thank you so much, professor!